Do You Get to Keep Your Roth IRA Even if You File Bankruptcy? In Georgia, Yes, Says the Eleventh Circuit

In an issue of first impression, the Eleventh Circuit Court of Appeals has ruled that a Roth IRA is not property of a bankruptcy estate in Georgia. Hoffman v. Signature Bank of Georgia, Case No. 20-12823 (11th Cir. Jan. 24, 2022). This means that a bankruptcy trustee cannot get to the Roth IRA for the benefit of creditors. Although this creates a possible barrier for creditors and bankruptcy trustees attempting to liquidate assets held in retirement accounts, it does not necessarily mean that individual retirement accounts are always excluded from administration in an individual bankruptcy case.

Factual and Procedural Background in Hoffman v. Signature Bank of Georgia

In Hoffman, the debtor was a retired Air Force Colonel who had personally guaranteed a large SBA loan that his son-in-law used to operate a restaurant. In re Hoffman, 605 B.R. 560, 563 (Bankr. N.D.Ga. 2019) (Drake, J.). After the business failed, the bank initiated a lawsuit against the debtor, the son-in-law, and the debtor’s daughter. Id. Shortly thereafter, the debtor filed a voluntary petition for relief under Chapter 7 of the Bankruptcy Code (as did his son-in-law and daughter). Id.

On his bankruptcy disclosure forms, the debtor scheduled interests in over $1.7 million held in various retirement accounts, including a 401(k), a traditional IRA, and two Roth IRAs, and he exempted the entire value of those accounts under various subsections of O.C.G.A. § 44-13-100(a).  Id.

Following an objection to the debtor’s claimed exemptions in these accounts, the bankruptcy court addressed, among other things, the following issues:  (a) whether the two Roth IRAs were excluded from the debtor’s bankruptcy estate under 11 U.S.C. § 541(c)(2); and (b) if they were property of the bankruptcy estate, whether they were exemptible under Georgia’s exemption statutes. Id. at 563-64.

The bankruptcy court found that the Roth IRAs were property of the bankruptcy estate, but held that they were not exemptible under applicable Georgia law because they were not reasonably necessary for the support of the debtor or his wife. Id. at 569. This meant that the Chapter 7 trustee could get to those Roth IRAs and use them to pay the debtor’s creditors. The debtor conceded that the Roth IRAs were not exemptible, but appealed the holding that they were property of his estate to the district court. The district court declined to overrule on what was an issue of first impression. The debtor then appealed to the Eleventh Circuit Court of Appeals.

Applicable Law

Before addressing the Eleventh Circuit’s ruling in Hoffman, it is important briefly to review the applicable law. When a debtor files a bankruptcy petition, a bankruptcy estate is formed, and it includes all of the debtor’s legal and equitable interests in property. 11 U.S.C. § 541(a).  However, even though this seems broad and inclusive, certain property interests are excluded from the bankruptcy estate and, therefore, a bankruptcy trustee cannot get to those assets for the benefit of creditors. More specifically, as it relates to Hoffman, Section 541(c)(2) “excludes from the bankruptcy estate property of the debtor that is subject to a restriction on transfer enforceable under ‘applicable nonbankruptcy law.’” Patterson v. Shumate, 504 U.S. 753, 755 (1992) (quoting 11 U.S.C. § 541(c)(2)). For example, in In re Meehan, the Eleventh Circuit held that because Georgia’s garnishment laws prohibited a judgment creditor from garnishing funds in a traditional IRA (established under 26 U.S.C. § 408), a traditional IRA is not property of a bankruptcy estate.  See In re Meehan, 102 F.3d 1209, 1211-14 (11th Cir. 1997). However, the inquiry does not stop there, if a debtor is an individual and not an artificial entity. If an asset is property of the estate, then the individual debtor may be able to exempt it and effectively remove it from the bankruptcy estate and administration.

Importantly for purposes of the outcome in Hoffman, the decision in Meehan was issued before Congress had authorized Roth IRAs (i.e., it had not yet adopted 26 U.S.C. § 408A). Also, after Meehan, in 2016, the Georgia Legislature amended the applicable garnishment statute to state that “[f]unds or benefits from an individual retirement account or from a pension or retirement program shall be exempt from the process of garnishment until paid or otherwise distributed to a member of such program or beneficiary thereof.” O.C.G.A. § 18-4-6 (2016) (emphasis added). In short, through this amendment, the Legislature removed any specific reference to Section 408 or Section 408(A) of the Tax Code. Because of this removal, and because the debtor had conceded that he was not able to exempt the Roth IRAs under applicable Georgia law, the issue on appeal in Hoffman turned on whether a Roth IRA is an “individual retirement account” within the meaning of the newly amended Georgia garnishment statute. The debtor said it was, and the appellee bank argued it was not.

The Holding in Hoffman

In analyzing whether the debtor or the bank was correct, the Eleventh Circuit first found that, based on prior case law holding that the prior version of the Georgia garnishment statute allowed the garnishment of Roth IRAs (the old version of Georgia’s garnishment statute specifically referenced Section 408 accounts, but made no mention of Section 408A Roth IRAs), and the subsequent amendment to O.C.G.A. § 18-4-6 in 2016 in which the Georgia Legislature removed any specific reference to Section 408 or Section 408A accounts, the Georgia Legislature intended to make clear that both traditional IRAs and Roth IRAs are exempt from garnishment.  Hoffman, Case No. 20-12823, at *9 of 10. As a result, the Eleventh Circuit held that Roth IRAs (like traditional IRAs) are not property of a bankruptcy estate in Georgia, and reversed and remanded the matter to the district court. Id. at *10 of 10.

Key Takeaways

Hoffman stands for the proposition that a Roth IRA is not property of a bankruptcy estate in Georgia and, thus, it cannot be administered for the benefit of creditors. That is obviously good from a debtor’s perspective, but bad from the perspective of creditors and bankruptcy trustees. Hoffman expands the Eleventh Circuit’s holding in Meehan and creates another barrier to recovering from a debtor’s individual retirement accounts. Nonetheless, it is important for debtors, creditors, and trustees to recognize that recoveries are still possible from these accounts in certain circumstances. For example, under 26 U.S.C. § 408(e), if a debtor engages in a prohibited transaction (as defined by the Tax Code), the account ceases to be considered an individual retirement account, and thus becomes subject to administration. In addition, the Supreme Court recently held that an inherited IRA is not an individual retirement account within the meaning of the applicable exemption statute, and is thus subject to administration by a bankruptcy trustee. See Clark v. Rameker, 573 U.S. 122 (2014). In a nutshell, despite the holding in Hoffman, creditors and trustees should consider whether scheduled retirement accounts are, in fact, “individual retirement accounts” within the meaning of the applicable statutes. If they are not, they may still be subject to administration for the benefit of creditors.